Economy nearly sputtered out at end of 2007

Thursday

The economy nearly sputtered out at the end of the year and is probably faring even worse now amid continuing housing, credit and financial crises.

The economy nearly sputtered out at the end of the year and is probably faring even worse now amid continuing housing, credit and financial crises.

The Commerce Department reported Thursday that gross domestic product increased at a feeble 0.6 percent annual rate in the October-to-December quarter. The reading — unchanged from a previous estimate a month ago — provided stark evidence of just how much the economy has weakened. In the prior quarter, the economy clocked in at a sizzling 4.9 percent growth rate.

The gross domestic product (GDP) measures the value of all goods and services produced in the United States and is the best barometer of the country's economic health.

Many economists say they believe growth in the current January-to-March quarter will be even weaker than the 0.6 percent figure of the previous quarter. A growing number also say the economy may actually be shrinking now. Under one rough rule, the economy needs to contract for six straight months to be considered in a recession. The government will release its estimate for first-quarter GDP in late April.

"The economy just kept its head above water" in the fourth quarter, said Nigel Gault, chief U.S. economist at Global Insight. "We think that GDP will decline, albeit slightly, during the first half of 2008," he said. "The first half outlook is bleak."

On Wall Street, stock were down in morning trading.

In another report, fewer people signed up for unemployment benefits last week, although that didn't change the broader picture of a deteriorating jobs market. The Labor Department said jobless claims fell by 9,000 to 366,000, a better showing than many economists were forecasting. Still, unemployment is expected to rise this year given all the problems clobbering the economy.

Thursday's report underscored the damage to the economy from the collapse in the housing market, which has dragged down housing prices, pushed home foreclosures up to record highs and has led to a glut of unsold homes.

Against that backdrop, builders slashed spending on housing projects by a whopping 25.2 percent on an annualized basis in the fourth quarter, the biggest cut in 26 years.

To limit the damage from the crises, the Federal Reserve has taken a number of extraordinary actions. It has slashed a key interest rate over the last two months by the most in a quarter century. And to relieve turmoil on Wall Street, which intensified after the crash of the country's fifth-largest investment firm, Bear Stearns, the Fed has resorted to its greatest expansion of lending authority since the 1930s. Big securities firms will temporarily be allowed to go to the Fed directly for loans — a privilege that had been afforded only to commercial banks.

With the nation's economic woes a top concern for voters, the White House and Democrats in Congress have been scrambling to provide relief. Democratic presidential candidate Barack Obama on Thursday called for an overhaul of financial regulations.

Consumers, whose spending is indispensable to the economy's vitality, boosted buying at a 2.3 percent pace in the fourth quarter. That was better than the 1.9 percent growth rate previously estimated but still marked a slowing from the third quarter's 2.8 percent pace.

Businesses — nervous about customers' waning appetite to buy given all the problems in the economy — cut back sharply on their inventories of unsold goods. That shaved 1.79 percentage points off fourth-quarter GDP, the most in more than two years.

Spending by businesses on equipment and software, meanwhile, rose at a pace of 3.1 percent in the final quarter of last year. That was slightly less than previously estimated and marked a slowdown from the prior quarter's 6.2 percent growth rate.

Businesses' profits also took a hit in the final quarter. A measure linked to the GDP report showed that after-tax profits fell 3.3 percent at the end of last year, after being flat in the prior quarter.

There was a bright spot in the mostly gloomy report, however. Sales of U.S. goods and services to other countries grew at a 6.5 percent pace. That was better than the 4.8 percent growth rate previously estimated, although it was down sharply from the prior quarter's blistering 19.1 percent growth rate.

U.S. exports have been helped by the sinking value of the U.S. dollar, which makes U.S. goods less expensive to foreign buyers. The U.S. dollar recently plunged to record lows against the euro and has fallen sharply against the Japanese yen.

The drooping dollar can aggravate inflation pressures.

An inflation measure linked to the GDP report showed that overall prices increased at a rate of 3.9 percent in the fourth quarter. That was not as high as previously estimated but marked a big pickup from the third quarter's 1.8 percent pace.

Another gauge showed that "core" prices — excluding food and energy — grew at a rate of 2.5 percent at the end of last year. That was down from a previous estimate of a 2.7 percent pace but was up from the prior quarter's 2 percent growth rate.

The new core inflation figure is above the Fed's comfort zone — the upper bound of which is a 2 percent inflation rate.

Although the Fed's No. 1 job is trying to save the economy from a deep and prolonged recession, it is also keeping close tabs on inflation and soaring energy prices.

Oil prices are topping $105 a barrel. Gasoline prices have marched higher, too. High energy prices can spread inflation if lots of companies boost prices charged to customers for a wide range of goods and services. High energy prices also can be a drag on overall economic growth by crimping consumer spending.

The combination of slowing economic growth and rising inflation make the Fed's job more difficult. It also has raised fears the country may be headed for a bout of stagflation, a scenario the U.S. hasn't experienced since the 1970s. Fed Chairman Ben Bernanke, however, has said that's not the case.

The Fed's rate reductions along with the government's $168 billion stimulus package of tax rebates for people and tax breaks for businesses should help revive economic growth in the second half of this year, economists said.

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